FedEx Corporation is synonymous with overnight delivery, an industry the company developed during the 1970s and one which, nearly three decades later, it continues to dominate. The market leader has restructured for the 21st century and is now composed of five major operating companies: FedEx Express, FedEx Ground, FedEx Freight, FedEx Custom Critical, and FedEx Trade Networks. Operating in 211 countries, FedEx Express is the world’s largest express shipping company. FedEx Ground ships small packages by ground and is the second largest provider of such services in North America. FedEx Freight provides regional freight deliveries on a less-than-truckload basis. FedEx Custom Critical serves customers who need very critically timed shipments. Finally, FedEx Trade Networks furnishes a variety of consulting, customs brokerage, and information technology services. Every business day FedEx makes almost five million physical shipments and processes over 100 million electronic transactions. FedEx thus uses its planes, ground vehicles, and electronic technologies to speed up transportation so that companies and individuals can transfer time-sensitive material across vast distances in virtually seamless fashion.

From Term Paper Topic to Reality: 1970s

FedEx was founded as Federal Express Corporation in 1971, by 28-year-old Memphis, Tennessee, native Frederick W. Smith. Smith, a former Marine pilot in Vietnam, originally outlined his idea for an overnight delivery service in a term paper he wrote for a Yale University economics class. He felt that air freight had different requirements than air passenger service and that a company specializing in air freight rather than making it an add-on to passenger service would find a lucrative business niche. Speed was more important than cost, in Smith’s view, and access to smaller cities was essential. His strategies included shipping all packages through a single hub and building a private fleet of aircraft. Company-owned planes would free the service from commercial airline schedules and shipping regulations, while a single hub would permit the tight control that got packages to their destinations overnight. In making his dream a reality, Smith selected Memphis as his hub: it was centrally located and despite inclement weather its modern airport rarely closed.

Smith supplemented a $4 million inheritance from his father with $91 million in venture capital to get his idea off the ground. In 1973 FedEx began service in 25 cities with a fleet of 14 Dassault Falcon aircraft and 389 employees. The planes, which were relatively small in size, collected packages from airports every night and brought them to Memphis, where they were immediately sorted. They were then flown to airports close to their destination and delivered by FedEx trucks the following morning.

Smith’s idea was costly indeed; it required creating an entire system before the company’s first day of business. FedEx added to these start-up costs by beginning expensive advertising and direct-mail campaigns in 1975. The company lost $29 million in its first 26 months of operation: in 1975 alone it gained $43.5
million in sales against an $11.5 million loss. Smith’s investors considered removing him from the helm of the fledgling company, but company President Arthur Bass backed the young founder. Bass improved delivery schedules and FedEx’s volume climbed to the point where it was profitable: By late 1976 the company was carrying an average of 19,000 packages a night, and by year’s end it was $3.6 million in the black.

In 1977 company profits hit $8 million on sales of $110 million. The company had 31,000 regular customers, including such giants as IBM and the U.S. Air Force, which used it to ship spare parts. It also shipped blood, organs for transplant, drugs, and other items requiring swift transport. FedEx serviced 75 airports and 130 cities. While the major airlines gave the company stiff competition on heavily traveled passenger routes, there was virtually no competition on routes between smaller cities. Its principal competitor, Emery Air Freight, used commercial airlines to ship packages, giving FedEx an important time advantage.

Airline Deregulation Fueling Growth: 1977

Deregulation of the airline industry in 1977 gave the still-struggling company an important boost. At the time of FedEx’s startup, the U.S. airline industry had been subject to tight federal regulation. In fact, the company had only managed to get into business through an exemption that allowed any company to enter the common carrier business if its payloads were under 7,500 pounds. These self-same regulations, written in 1938 to protect passenger airlines, would ultimately hold back FedEx’s growth. The company was forced to fly up to eight small Falcon jets side-by-side to bigger markets when use of one larger jet would have saved money. Smith led a legislative fight to end regulation, and a bill doing so was passed in 1977. Deregulation meant the company could fly anywhere in the United States anytime, and use larger aircraft including 727s, and later, DC-10s. FedEx bought a fleet of used 727–100Cs, using its Falcons to expand into small- and medium-sized markets.

In 1978, with its prospects looking solid, FedEx went public, selling its first shares on the New York Stock Exchange. The move raised needed capital and gave the company’s backers a chance to regain a portion of their initial investment. Profits for 1979 were $21.4 million on sales of $258.5 million. By late 1980 FedEx was well established and growing at about 40 percent a year. It had 6,700 employees and flew 65,000 packages a night to 89 cities across the United States. Its fleet included 32 Falcons, 15 727s, and five 737s.

Explosive growth continued as a tidal wave of businesses switched to overnight service. Miniaturization of consumer electronics and scientific instruments translated into increasing numbers of small, valuable packages needing express shipment. In addition, many U.S. companies were shifting to just-in-time inventories as a way to keep prices down, lessen quality-control problems, and cut costs. Consequently, these companies ofter needed emergency shipment of goods and parts, and FedEx was there to provide that much needed service. It soon began billing itself as a “500-mile-an-hour warehouse.”

Competition and Price Wars During the 1980s

A decline in the reliability of the U.S. Postal Service caused even more companies to switch to FedEx for important packages. Courier-Paks became the fastest growing part of the company’s business, accounting for about 40 percent of revenue. In 1980 Courier-Paks—envelopes, boxes, or tubes used for important documents, photographs, blueprints, and other items—cost the consumer $17 but guaranteed overnight delivery. By mid-1980 the company had eight DC-10s on order or option from Continental Airlines, each capable of carrying 100,000 pounds of small packages. It had also acquired 23 additional used 727s, and operated 2,000 delivery vans.

In mid-1981 FedEx announced a new product that would bring it into direct competition with the United States Posta Service (USPS) for the first time: the overnight letter. The document-size cardboard envelope, which could contain up to two ounces, would be delivered overnight for $9.50 at that time.

By 1981 Federal Express had the largest sales of any U.S. air freight company, unseating competitors such as Emery, Airborne Freight, and Purolator Courier, which had gone into business about two decades earlier. Unlike FedEx, competitors shipped packages of all sizes using regularly scheduled airlines, and did not stress speed; FedEx’s narrowly focused, speed-oriented ser vice won over many of its competitor’s customers. To compete, Emery copied FedEx’s strategy, buying its own planes, opening small-package sorting center, and pushing overnight delivery Airborne also entered the small-package air express business. United Parcel Service (UPS), the leading package-shipper by truck, moved into the air-express business in 1981. The USPS began heavily marketing its own overnight-mail service after FedEx’s Courier-Pak began eating into its revenues. The Postal Service’s overnight mail was about half the price of FedEx’s, bu was not as accessible in many locations.

While FedEx was the leader in the U.S. overnight package-delivery industry, DHL Worldwide Courier Express Network built a similar service overseas; the two would become major competitors when FedEx started building its own overseas network. Such increased competition put pressure on FedEx’s niche, but its lead was large and its reputation excellent. In 1983 the company reached $1 billion in annual revenues, the first company in the United States to do so within ten years of its start-up without mergers or acquisitions.

Company Perspectives:

In today’s Network Economy, FedEx Corporation is uniquely positioned to leverage the power of networks to help connect our customers to the high-tech, high-speed global marketplace .

Aggressively Pursuing International Market Dominance: 1980s

In 1984 FedEx made its first acquisition, Gelco Express, Minneapolis-based package courier that served 84 countries. Hoping to recreate its U.S. market dominance overseas, thí company made further acquisitions in Britain, the Netherlands, and the United Arab Emirates. Meanwhile, UPS also began building a competing overseas system.

By the late 1970s Smith had realized that up to 15 percent of the company’s Courier-Pak business was information that would eventually be digitally transmitted as telephone and computer technology improved. He spent $100 million to develop his own electronic-mail system, which was launched in 1984 as ZapMail. A system for sending letters by fax machine and couriers, ZapMail was plagued by technology problems from the beginning: fax machines broke down frequently; light-toned originals would not transmit; minor telephone-line disturbances interrupted transmissions. ZapMail cost $35 for documents up to five pages, plus $1.00 for each additional page, and high-volume customers soon discovered it was less expensive to install their own fax machines. The program also faced competition from MCI Communications’ electronic-mail system. ZapMail was still losing money in 1986 when FedEx abandoned the system, taking a $340 million charge against earnings. In line with the company’s policy of limiting layoffs, the 1,300 employees working on the ZapMail system were absorbed into other FedEx operations.

In 1985 FedEx took a major step in its attempt to expand its services to Europe by opening a European hub at the Brussels airport. Revenue reached $2 billion in 1985. In 1986 the company opened sorting centers in Oakland, California, and Newark, New Jersey, to more quickly handle shipments to nearby high-volume destinations. In addition, FedEx’s hubs were being transformed into warehouses for its clients, as parts were stored there until customers needed them, then shipped overnight. For example, IBM used FedEx to store mainframe parts and get them quickly to malfunctioning computer systems. This trend coincided with a decline in FedEx’s overnight mail volume, which was hurt by the spread of fax machines and the lower rates charged by competitors. Revenue for 1987 was $3.2 billion, while rival UPS collected about $1.7 billion from overnight delivery.

By 1988 FedEx, with 54,000 employees, was providing service to about 90 countries and claimed to ship about 50 percent of U.S. overnight packages. Mounting competition, however, had led to a price war that eroded company profits from 16.9 percent of revenue in 1981 to 11 percent in 1987. Profits in 1988 were $188 million on revenue of $3.9 billion.

Expanding overseas proved tougher than FedEx had anticipated, and the company’s international business lost $74 million between 1985 and 1989. In February 1989, hoping to quickly develop a global delivery system, FedEx bought Tiger International, Inc., for $883 million, thereby acquiring its heavy cargo airline, Flying Tiger Line. Before the acquisition, FedEx had landing rights in five airports outside the United States: Montreal, Toronto, Brussels, London, and limited rights in Tokyo. The company hoped to supplement these with the delivery routes Tiger had built over its 40-year history, which included landing rights in Paris and Frankfurt, three Japanese airports, and cities throughout east Asia and South America. FedEx could use its own planes on these routes instead of subcontract to other carriers, which the company had been doing in many countries. Tiger’s large fleet of long-range aircraft also gave FedEx an important foothold in the heavy-freight business. In 1988 Tiger had 22 747s, 11 727s, and six DC-8s; 6,500 employees; and revenue of $1.4 billion. Unfortunately, many of Tiger’s planes needed quick repairs to meet U.S. government safety deadlines, which led to lower than anticipated profits.

The purchase price paid by the company, which several analysts claimed was too much, also increased FedEx’s debt by nearly 250 percent to $2.1 billion, and put the company into a market that was more capital-intensive and cyclical than the domestic small-package market. Owning Tiger also put FedEx in an awkward position, since many of Tiger’s best customers were FedEx’s competitors, and the company feared it might lose many of them. Such fears proved unfounded, although Tiger’s on-time record temporarily fell to 80 percent after the takeover, climbing to 96 percent by early 1990.

Key Dates:

1971:

Federal Express Corporation is founded.

1973:

Company begins its operations with overnight shipping to 25 cities in the United States.

1977:

Federal deregulation of the airlines leads to growth for company.

1978:

Federal Express is first listed on the New York Stock Exchange.

1981:

Company introduces its overnight letter.

1984:

Purchase of Gelco Express International leads to service in Europe and the Pacific Rim; company begins its ZapMail system of electronic mail but ends it two years later.

1985:

Federal Express opens its European hub at Brussels.

1986:

Sorting centers in Oakland, California, and Newark, New Jersey, are opened.

1989:

Company buys Tiger International, Inc. to greatly expand its international business.

1994:

Federal Express Corporation shortens its name to FedEx.

1995:

Latin American and Caribbean division is started; company begins its AsiaOne program through a new hub at Subie Bay, Philippines.

1998:

FedEx becomes FDX Corporation and acquires Caliber System, Inc.

1999:

opens first European hub at Paris’ Charles de Gaulle Airport and a Miami office to serve Latin America.

2000:

FDX Corporation reverts to the name FedEx Corporation.

2001:

American Freightways Corporation is acquired and FedEx is reorganized; FedEx and the U.S. Postal Service begin a seven-year cooperative venture.

At the same time price wars continued with competitors, some of which made inroads into the overnight market. Earnings from UPS’s overnight service rose 63 percent between 1984 and 1988, and its revenues tripled. FedEx had a 55 percent share of the U.S. overnight letter market and shipped 33 percent of U.S. overnight packages. It was clearly the leader in the express delivery business, but its growth was slowing. FedEx’s U.S. shipment volume grew 58 percent in 1984 but declined to 25 percent in 1988. The company compensated by pushing its higher-margin package service, which grew 53 percent from 1987 to 1989. Analysts estimated that packages
provided 80 percent of FedEx’s revenues and about 90 percent of its profits.

In April 1990 FedEx raised its domestic prices, ending the seven-year price war. The U.S. air-freight industry was consolidating, and rival UPS had heavy capital expenses from its own overnight air service, giving its competitor room to raise its prices. FedEx needed the extra profits, estimated at between $50 million and $75 million a year, to help pay for losses in its international business. Its foreign operations lost $194 million in 1989 as it struggled to integrate Tiger and build a delivery system in Europe. Tiger was unionized but unstructured; FedEx was non-union but bureaucratic. Several uneasy months passed while the two systems were unified and a pilot seniority list was drawn up. To help increase overseas tonnage, the company introduced one-, two-, and three-day service to large shippers between 25 cities worldwide and 85 cities in the United States.

Business in the Early 1990s

FedEx entered the 1990s with increasing competition in the U.S. market, but was able to maintain its leading market share. UPS, now its main competitor, continued to slowly woo away some customers by introducing volume discounts, a policy which it had resisted for years. FedEx responded by instituting a customer-by-customer review of its own pricing strategy that resulted in a consolidation of subcontractor trucking routes, the streamlining of pickup and delivery routes, and an increased profitability of certain freight runs; in some cases prices were also adjusted upward. Enhancements were offered to express-service customers, including earlier-in-the day service options, computer software that allowed FedEx clients to electronically prepare all shipping documentation, and Internet tracking of shipments via FedEx’s new homepage. The company’s network of retail affiliates was also expanded, with new FedEx drop-boxes installed in more than 870 office supply superstores nationwide. The results: Despite erosion from aggressive competitors, FedEx’s domestic package volume rallied in mid-1992, with revenues growing from $7.6 billion to $7.8 billion over the previous year.

Internally, FedEx began companywide cost-containment policies to reduce waste and overhead, as well as gain increased efficiency in meeting the needs of its customers. The company’s Station Review Process allowed the most effective local policies to be shared by the entire FedEx station network. Despite cost-cutting measures, however, employee-related expenses rose when FedEx became mired in over two years of contract negotiations with the Air Line Pilots Association (ALPA). Despite what Smith had considered generous enough salaries and benefit packages to keep the threat of unionization at bay, heated labor negotiations ultimately resulted in the 1996 unionization of FedEx’s 3,100 pilots. However, only a few weeks after the pro-union vote, an organization of company pilots was petitioning the National Labor Mediation Board to call a second vote to oust the union, leading analysts to doubt ALPA’s continued influence over FedEx budgetary policy. On the plus side, the expiration of a federal cargo tax during the federal budget impasse of January 1996 would provide FedEx with a fiscal boost as the company maintained prices despite a temporary hiatus in federally directed excise payments.

In the early 1990s FedEx’s foreign operations were troubled, and their losses dragged down company earnings. While overall sales rose from $5.2 billion in 1989 to $7.69 billion in fiscal 1991, operating income fell from $424 million to $279 million over the same period, much of it resulting from the costly development of overseas markets. Industry analysts were divided over whether or how soon the company would be able to make its foreign operations profitable. Some analysts questioned how long FedEx could accept international losses while carrying $2.15 billion in long-term debt.

Smith countered such concerns by arguing that when the company’s international volume increased, international service would become profitable. In an effort to boost that volume, FedEx traded in its 727s for larger capacity Airbus Industrie jet aircraft for their three daily European-destination flights, filling extra cargo space with non-express packages to increase per-flight profitability. In 1994 the company became the first international express cargo carrier to receive systemwide ISO 9001 certification; by mid-decade international service accounted for 12 percent of the company’s business: FedEx linked over 200 countries and territories worldwide, representing the bulk of global economic transactions. By 1996 the company could boast sales of $10.27 billion against operating income of $624 million.

Expansion in the Late 1990s and the New Century

Aggressive international route expansion included creating divisions in several hemispheres. A Latin America and Caribbean division was created in 1995 to integrate services within the world’s second-fastest growing economic region. In September of that year the company introduced FedEx AsiaOne: a next-business-day service between Asian countries and the United States. Via a hub established at Subie Bay, Philippines, FedEx planned to duplicate its successful hub-and-spoke delivery service within 11 of that continent’s commercial and financial centers. Unfortunately, the company’s plans were confounded by the Japanese government, which limited FedEx’s flying rights from Japan to other Asian countries in mid-1996, after a series of talks between the United States and Japan failed to yield a compromise. While the U.S. government contemplated appropriate sanctions against the Japanese government for its failure to honor existing flight privileges with FedEx, Japan viewed the company’s growing success in Asia as a threat to its own overseas cargo industry. Despite difficulties with Japan, the extension of its world renowned service to the Pacific Rim area placed FedEx in a strategic position within one of the fastest-growing economic centers in the world, particularly with regard to China, where the company was the sole U.S.-based cargo service then authorized to do business.

In 2001 FedEx worked to gain approval to create a new hub at the Piedmont Triad International (PTI) Airport near Greensboro, North Carolina. PTI planned to build a new runway to accommodate FedEx. Critics included the Cardinal West and Prestwich homeowners associations that opposed the noise, air, and water pollution, and decreased land values that they felt would result from the new hub. Meanwhile, FedEx and the U.S. Postal Service in January 2001 announced a $6.3 billion, seven-year cooperative agreement in which FedEx would use its planes to carry first-class, Express, and Priority mail. In June 2001 FedEx began
putting its collection boxes at post offices, and the system became operational a few months later. Responding to these developments, Emery Worldwide Airlines filed a lawsuit against the USPS deal for lack of competition. Ryan International Airlines and Evergreen International Aviation also protested the alliance in U.S. House of Representatives committee meetings. The U.S. Justice Department considered starting an antitrust investigation into the USPS/FedEx arrangement.

In 2001 FedEx Corporation was a holding company with five main subsidiaries. FedEx Express served customers in 211 countries. Every business day it delivered 3.3 million packages using a fleet of 662 aircraft, including large planes such as the Airbus A300, McDonnell DC10, and Boeing 727, and also smaller planes such as the Cessna 208. With over 45,500 ground vehicles, FedEx Express remained the leader in the overnight express delivery business. Based in Pittsburgh, FedEx Ground (formerly RPS) handled small-package delivery with over 9,000 vehicles. It delivered about 1.6 million packages every business day, according to the company web site. With services in the United States, Canada, Puerto Rico, and Mexico, FedEx Ground was North America’s second largest ground carrier and delivered small packages business to business. Its FedEx Home Delivery was added in March 2000. FedEx Ground reported annual revenue of $2 billion in fiscal 2000. According to a Morning Call article on February 8, 2001, FedEx Ground delivered items in 70 percent of the United States, compared to its competitors United Parcel Service (UPS) and the U.S. Postal Service, which had full coverage.

FedEx Freight, the third subsidiary, provided next-day and second-day regional freight services on a less than truckload (LTL) basis. With $1.9 billion in annual sales, FedEx Freight included two formerly independent trucking companies. Viking Freight, Inc. was founded in 1966 in San Jose, California. It shipped goods in Arizona, California, Colorado, Idaho, Nevada, New Mexico, Oregon, Utah, Washington, parts of Texas near El Paso, and also Alaska and Hawaii via ocean shipping. It also transported goods into Mexico and Canada. FedEx Freight’s second trucking firm was American Freightways Corporation, based in Harrison, Arkansas. Founded in 1982, it served most states and also the Caribbean islands, Guam, and Central and South America through partnerships with other companies. This LTL carrier’s history was included on its web site at www.arfw.com. In 2000 its 17,000 employees brought in annual sales of $1.43 billion. FedEx acquired American Freight-ways in February 2001. Subsidiary FedEx Custom Critical picked up and delivered whatever its customers needed around the clock and every day of the year. Based in Akron, Ohio, FedEx Custom Critical delivered about 1,000 shipments daily to customers in the United States, Canada, and Europe. The FedEx web site described this subsidiary as “North America’s largest time-specific, critical shipment carrier.” FedEx Trade Networks served customers worldwide by providing customs brokerage, consulting, and electronic services. Founded in February 2000, this fifth subsidiary employed about 1,600 persons. Its operating companies included Tower Group International, Inc., which had 63 North American offices and also Asian offices through agent partners; Worldtariff, Limited, which published customs duty and tax data for 101 nations; and Caribbean Transportation Services, the “leading provider of airfreight forwarding services between the United States and Puerto Rico,” according to the FedEx Web site. FedEx customers placed 60,000 daily telephone calls to company representatives to keep track of their shipments. The Internet and electronic technology were used for 1.2 million daily delivery trackings through the fedex.com web site. This combination of high-touch and high-tech methods of tracking millions of daily shipments proved crucial to the success of FedEx.

FedEx in 2001 used 94,800 ground vehicles, including its long-haul trucks, to deliver letters, small packages, and larger freight items to international destinations. That was combined with its air fleet of small and large planes, electronic message system, and strategic alliances, including that with La Poste in Europe. “FedEx has built what is the most seamless global air and ground network in its industry, connecting more than 90 percent of the world’s economic activity,” said William G. Margaritis, FedEx Corporation’s vice president for world communications and investor relations. With the rapid rise of virtually instantaneous electronic mail, some wondered if FedEx overnight mail delivery was as important as it was in the past. Margaritis pointed out that the company received only 9.3 percent of its revenue from overnight express mail, and that much of that mail could not be delivered electronically, such as gifts, electronic components, and medical equipment.

FedEx completed its fiscal year ending May 31, 2001 with mixed financial results. The good news was an 8 percent increase in company revenue to $19.6 billion from $18.3 billion the year before. However, operating income fell 12 percent from $1.22 billion to $1.07 billion, and net income decreased 15 percent from $688 million to $584 million. In 2001 FedEx faced tough competition, especially from United Parcel Service, the industry leader in ground deliveries. It still competed with the U.S. Postal Service, but its cooperative venture with the latter was a major step for both entities. In any case, FedEx had expanded far beyond what Frederick W. Smith started back in 1971. Thirty years later, CEO Smith remained as the head of FedEx, providing leadership continuity during the company’s rapid expansion and change.

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FedEx Corporation specializes in overnight delivery of high-priority packages, documents, and heavy freight. The company created the overnight air-express industry virtually singlehandedly in the 1970s; its success was such that by the 1990s it faced the sincerest form of flattery: increasing competition from rival carriers. However, FedEx’s continued mastery of logistics and its ability to track packages during the shipping process has enabled it to retain its leadership role in the express air cargo industry, as well as act as a moving warehouse for numerous corporate and individual customers. It operates in 211 countries, and serves all of the United States, providing 24-to-48-hour delivery of valuable, time-sensitive cargo to any destination worldwide.

FedEx was founded as Federal Express Corporation in 1971, by 28-year-old Memphis, Tennessee, native Frederick W. Smith. Smith, a former Marine pilot, originally outlined his idea for an overnight delivery service in a term paper he wrote for a Yale University economics class. He felt that air freight had different requirements than air passenger service and that a company specializing in air freight rather than making it an add-on to passenger service would find a lucrative business niche. Speed was more important than cost, in Smith’s view, and access to smaller cities was essential. His strategies included shipping all packages through a single hub and building a private fleet of aircraft. Company-owned planes would free the service from commercial-airline schedules and shipping regulations, while a single hub would permit the tight control that got packages to their destinations overnight. In making his dream a reality, Smith selected Memphis as his hub: it was centrally located and despite inclement weather its modern airport rarely closed.

Term Paper Topic Becomes Reality, 1973

Smith supplemented a $4 million inheritance from his father with $91 million in venture capital to get his idea off the ground. In 1973 FedEx began service in 25 cities with a fleet of 14 Dassault Falcon aircraft and 389 employees. The planes, which were relatively small in size, collected packages from airports every night and brought them to Memphis, where they were immediately sorted. They were then flown to airports close to their destination and delivered by FedEx trucks the following morning.

Smith’s idea was costly indeed; it required creating an entire system before the company’s first day of business. FedEx added to these start-up costs by beginning expensive advertising and direct-mail campaigns in 1975. The company lost $29 million in its first 26 months of operation: in 1975 alone it gained $43.5 million in sales against an $11.5 million loss. Smith’s investors considered removing him from the helm of the fledgling company, but company president Arthur Bass backed the young founder. Bass improved delivery schedules and FedEx’s volume climbed to the point where it was profitable: By late 1976 the company was carrying an average of 19,000 packages a night, and by year’s end it was $3.6 million in the black.

In 1977 company profits hit $8 million on sales of $110 million. The company had 31,000 regular customers, including such giants as IBM and the U.S. Air Force, which used it to ship spare parts. It also shipped blood, organs for transplant, drugs, and other items requiring swift transport. FedEx serviced 75 airports and 130 cities. While the major airlines gave the company stiff competition on heavily traveled passenger routes, there was virtually no competition on routes between smaller cities. Its principal competitor, Emery Air Freight, used commercial airlines to ship packages, giving FedEx an important time advantage.

Airline Deregulation in 1977 Fuels Growth

Deregulation of the airline industry in 1977 gave the still-struggling company an important boost. At the time of FedEx’s startup, the U.S. airline industry had been subject to tight federal regulation. In fact, the company had only managed to get into business through an exemption that allowed any company to enter the common carrier business if its payloads were under 7,500 pounds. These self-same regulations, written in 1938 to protect passenger airlines, would ultimately hold back FedEx’s growth. The company was forced to fly up to eight small Falcon jets side-by-side to bigger markets when use of one larger jet would have saved money. Smith led a legislative fight to end regulation, and a bill doing so was passed in 1977. Deregulation meant the company could fly anywhere in the United States anytime, and use larger aircraft like 727s, and later, DC-10s. FedEx bought a fleet of used 727-1OOCs, using its Falcons to expand into small- and medium-sized markets.

In 1978, with its prospects looking solid, FedEx went public, selling its first shares on the New York Stock Exchange. The move raised needed capital and gave the company’s backers a chance to gain back a portion of their initial investment. Profits for 1979 were $21.4 million on sales of $258.5 million. By late 1980 FedEx was well established and growing at about 40 percent a year. It had 6,700 employees and flew 65,000 packages a night to 89 cities across the United States. Its fleet included 32 Falcons, 15 727s, and five 737s.

Explosive growth continued as a tidal wave of businesses switched to overnight service. Miniaturization of consumer electronics and scientific instruments translated into increasing numbers of small, valuable packages needing express shipment. In addition, many U.S. companies were shifting to just-in-time inventories as a way to keep prices down, lessen quality-control problems, and cut costs. Consequently, these companies often needed emergency shipment of goods and parts, and FedEx was there to provide that much-needed service. It soon began billing itself as a “500-mile-an-hour warehouse.”

Competition and Price Wars During the 1980s

A decline in the reliability of the U.S. Postal Service caused even more companies to switch to FedEx for important packages. Courier-Paks became the fastest growing part of the company’s business, accounting for about 40 percent of revenue. In 1980 Courier-Paks—envelopes, boxes, or tubes used for important documents, photographs, blueprints, and other items—cost the consumer $17 but guaranteed overnight delivery. By mid-1980 the company had eight $24 million DC-10s on order or option from Continental Airlines, each capable of carrying 100,000 pounds of small packages. It had also acquired 23 additional used 727s, and operated 2,000 delivery vans.

In mid-1981 FedEx announced a new product that would bring it into direct competition with the U.S. Postal Service (USPS) for the first time: the overnight letter. The document-size cardboard envelope, which could contain up to two ounces, would be delivered overnight for $9.50 at that time.

By 1981 Federal Express had the largest sales of any U.S. air freight company, unseating competitors like Emery, Airborne Freight, and Purolator Courier, which had gone into business about two decades earlier. Unlike FedEx, competitors shipped packages of all sizes using regularly scheduled airlines, and didn’t stress speed; FedEx’s narrowly focused, speed-oriented service won over many of its competitor’s customers. To compete, Emery copied FedEx’s strategy, buying its own planes, opening a small-package sorting center, and pushing overnight delivery. Airborne also entered the small-package air express business. United Parcel Service of America (UPS), the leading package-shipper by truck, moved into the air-express business in 1981. The USPS began heavily marketing its own overnight-mail service after FedEx’s Courier-Pak began eating into its revenues. The Postal Service’s overnight mail was about half the price of FedEx’s, but was not as accessible in many locations.

While FedEx was the leader in the U.S. overnight package-delivery industry, DHL Worldwide Courier Express Network built a similar service overseas; the two would become major competitors when FedEx started building its own overseas network. Such increased competition put pressure on FedEx’s niche, but its lead was large and its reputation excellent. In 1983 the company reached $1 billion in annual revenues—the first company in the United States to do so within ten years of its start-up without mergers or acquisitions.

Aggressively Pursues International Market Dominance

In 1984 FedEx made its first acquisition, Gelco Express, a Minneapolis-based package courier that served 84 countries. Hoping to recreate its U.S. market dominance overseas, the company made further acquisitions in Britain, the Netherlands, and the United Arab Emirates. Meanwhile, UPS also began building a competing overseas system.

Company Perspectives:

FedEx understands there is no such thing as a “glide path” to sustained profitability and market leadership in our industry. Instead, we‘re continually applying new information technologies, strategic management initiatives and aggressive marketing strategies to better connect with customers, reduce operating costs and improve profitability.

By the late 1970s Smith had realized that up to 15 percent of the company’s Courier-Pak business was information that would eventually be digitally transmitted as telephone and computer technology improved. He spent $100 million to develop his own electronic-mail system, which was launched in 1984 as ZapMail. A system for sending letters by fax machine and couriers, ZapMail was plagued by technology problems from the beginning: Fax machines broke down frequently; light-toned originals would not transmit; minor telephone-line disturbances interrupted transmissions. ZapMail cost $35 for documents up to five pages, plus $1.00 for each additional page, and high-volume customers soon discovered it was less expensive to install their own fax machines. The program also faced competition from MCI Communications’ electronic-mail system. ZapMail was still losing money in 1986 when FedEx abandoned the system, taking a $340 million charge against earnings. In line with the company’s policy of limiting layoffs, the 1,300 employees working on the ZapMail system were absorbed into other FedEx operations.

In 1985 FedEx took a major step in its attempt to expand its services to Europe by opening a European hub at the Brussels airport. Revenue reached $2 billion in 1985. In 1986 the company opened sorting centers in Oakland, California, and Newark, New Jersey, to more quickly handle shipments to nearby high-volume destinations. And FedEx’s hubs were being transformed into warehouses for its clients, as parts were stored there until customers needed them, then shipped overnight. For example, IBM used FedEx to store mainframe parts and get them quickly to malfunctioning computer systems. This trend coincided with a decline in FedEx’s overnight mail volume, which was hurt by the spread of fax machines and the lower rates charged by competitors. Revenue for 1987 was $3.2 billion, while rival UPS collected about $1.7 billion from overnight delivery.

By 1988 FedEx, with 54,000 employees, was providing service to about 90 countries and claimed to ship about 50 percent of U.S. overnight packages. Mounting competition, however, had led to a price war that eroded company profits from 16.9 percent of revenue in 1981 to 11 percent in 1987. Profits in 1988 were $188 million on revenue of $3.9 billion.

Expanding overseas proved tougher than FedEx had anticipated, and the company’s international business lost $74 million between 1985 and 1989. In February 1989, hoping to quickly develop a global delivery system, FedEx bought Tiger International, Inc., for $883 million, thereby acquiring its heavy-cargo airline, Flying Tiger Line. Before the acquisition, FedEx had landing rights in five airports outside the United States: Montreal, Toronto, Brussels, London, and limited rights in Tokyo. The company hoped to supplement these with the delivery routes Tiger had built over its 40-year history, which included landing rights in Paris and Frankfurt, three Japanese airports, and cities through east Asia and South America. FedEx could use its own planes on these routes instead of subcontract to other carriers, which the company had been doing in many countries. Tiger’s large fleet of long-range aircraft also gave FedEx an important foothold in the heavy-freight business. In 1988 Tiger had 22 747s, 11 727s, and six DC-8s; 6,500 employees; and revenue of $1.4 billion. Unfortunately, many of Tiger’s planes needed quick repairs to meet U.S. government safety deadlines, which led to lower-than-anticipated profits.

The purchase price paid by the company—which several analysts claimed was too much—also increased FedEx’s debt by nearly 250 percent to $2.1 billion, and put the company into a market that was more capital-intensive and cyclical than the domestic small-package market. Owning Tiger also put FedEx into an awkward position—many of Tiger’s best customers were FedEx’s competitors, and the company feared it might lose many of them. Such fears proved unfounded, although Tiger’s on-time record temporarily fell to 80 percent after the takeover, climbing to 96 percent by early 1990.

At the same time price wars continued with competitors, some of which made inroads into the overnight market. Earnings from UPS’s overnight service rose 63 percent between 1984 and 1988, and its revenues tripled. FedEx had a 55 percent share of the U.S. overnight letter market and shipped 33 percent of U.S. overnight packages. It was clearly the leader in the express-delivery business, but its growth was slowing. FedEx’s U.S. shipment volume grew 58 percent in 1984 but declined to 25 percent in 1988. The company compensated by pushing its higher-margin package service, which grew 53 percent from 1987 to 1989. Analysts estimated that packages provided 80 percent of FedEx’s revenues and about 90 percent of its profits.

In April 1990 FedEx raised its domestic prices, ending the seven-year price war. The U.S. air-freight industry was consolidating, and rival UPS had heavy capital expenses from its own overnight air service, giving its competitor room to raise its prices. FedEx needed the extra profits—estimated at between $50 million and $75 million a year—to help pay for losses in its international business. Its foreign operations lost $194 million in 1989 as it struggled to integrate Tiger and build a delivery system in Europe. Tiger was unionized but unstructured; FedEx was non-union but bureaucratic. Several uneasy months passed while the two systems were unified and a pilot seniority list was drawn up. To help increase overseas tonnage, the company introduced one-, two-, and three-day service to large shippers between 25 cities worldwide and 85 cities in the United States.

Maintains Market Lead in the 1990s

FedEx entered the 1990s with increasing competition in the U.S. market, but was able to maintain its leading market share. UPS, now its main competitor, continued to slowly woo away some customers by introducing volume discounts, a policy which it had resisted for years. FedEx responded by instituting a customer-by-customer review of its own pricing strategy that resulted in a consolidation of subcontractor trucking routes, the streamlining of pickup and delivery routes, and an increased profitability of certain freight runs; in some cases prices were also adjusted upward. Enhancements were offered to express-service customers, including earlier-in-the day service options, computer software that allowed FedEx clients to electronically prepare all shipping documentation, and Internet tracking of shipments via FedEx’s new homepage. And the company’s network of retail affiliates was expanded, with new FedEx drop-boxes installed in more than 870 office supply superstores nationwide. The results: Despite erosion from aggressive competitors, FedEx’s domestic package volume rallied in mid-1992, with revenues growing from $7.6 billion to $7.8 billion over the previous year.

Internally, FedEx began company-wide cost-containment policies to reduce waste and overhead, as well as gain increased efficiency in meeting the needs of its customers. The company’s Station Review Process allowed the most effective local policies to be shared by the entire FedEx station network. Despite cost-cutting measures, however, employee-related expenses rose when FedEx became mired in over two years of contract negotiations with the Air Line Pilots Association (ALPA). Despite what Smith had considered generous enough salaries and benefit packages to keep the threat of unionization at bay, heated labor negotiations ultimately resulted in the 1996 unionization of FedEx’s 3,100 pilots. However, only a few weeks after the pro-union vote, an organization of company pilots was petitioning the National Labor Mediation Board to call a second vote to oust the union, leading analysts to doubt ALPA’s continued influence over FedEx budgetary policy. On the plus side, the expiration of a federal cargo tax during the federal budget impasse of January 1996 would provide FedEx with a fiscal boost as the company maintained prices despite a temporary hiatus in federally directed excise payments.

In the early 1990s FedEx’s foreign operations were troubled, and their losses dragged down company earnings. While overall sales rose from $5.2 billion in 1989 to $7.69 billion in fiscal 1991 operating income fell from $424 million to $279 million over the same period, much of it resulting from the costly development of overseas markets. Industry analysts were divided over whether or how soon the company would be able to make its foreign operations profitable. Some analysts questioned how long FedEx could accept international losses while carrying $2.15 billion in long-term debt.

Smith countered such concerns by arguing that when the company’s international volume increased, international service would become profitable. In an effort to boost that volume, FedEx traded in its 727s for larger-capacity Airbus Industrie jet aircraft for their three daily European-destination flights, filling extra cargo space with non-express packages to increase per-flight profitability. In 1994 the company became the first international express cargo carrier to receive system-wide ISO 9001 certification; by mid-decade international service accounted for 12 percent of the company’s business: FedEx linked over 200 countries and territories worldwide, representing the bulk of global economic transactions. By 1996 the company could boast sales of $10.27 billion against operating income of $624 million.

Further Expansion and a Look to the Future

Aggressive international route expansion included creating divisions in several hemispheres. A Latin America and Caribbean division was created in 1995 to integrate services within the second-fastest world’s economic growth area. And in September of that year the company introduced FedEx AsiaOne: a next-business-day service between Asian countries and the United States. Via a hub established at Subic Bay, Philippines, FedEx planned to duplicate its successful hub-and-spoke delivery service within 11 of that continent’s commercial and financial centers. Unfortunately, the company’s plans were confounded by the Japanese government, which limited FedEx’s flying rights from Japan to other Asian countries in mid-1996, after a series of talks between the U.S. and Japan failed to reach a compromise. While the U.S. government contemplated appropriate sanctions against the Japanese government for its failure to honor existing flight privileges with FedEx, Japan viewed the company’s growing success in Asia as a threat to its own overseas cargo industry. Despite difficulties with Japan, the extension of its world-renowned service to the Pacific Rim area placed FedEx in a strategic position within one of the fastest-growing economic centers in the world—particularly with regard to China, where the company was the sole U.S.-based cargo service then authorized to do business.

Through 2015 the international express air cargo market was predicted to grow nearly 18 percent per year; FedEx was expected to reap a major portion of that growth as it saw its foreign operations increasing by as much as 25 percent per year. By retaining the confidence of its customers through its logistical capabilities, expanding the carrying capacity of its fleet of over 557 fuel-efficient aircraft and 37,000 vehicles, and a continued dedication to providing cost-effective express service, “FedEx it” continued to be the generic way to request express shipment.

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FedEx Corporation

FedEx Corporation

Since 1973 customers have turned to Federal Express when their important documents and small packages "absolutely, positively" must reach their destinations by the next morning. Over the years, founder Fred Smith transformed the company into the world's leading overnight shipper and a major force in ground shipping. Overnight delivery service increased the speed of business activity, first in the United States and then around the world. In 1994, Federal Express changed its name to FedEx since the shortened nickname had become so popular; most customers even used it as a verb. People didn't simply ship a package, they "Fedexed" it.

From College Term Paper to New Company

In 1965, while attending Yale University, Fred Smith wrote an economics paper exploring how goods were transported in the United States. At the time, shippers focused on transporting large packages across the United States by truck or inside passenger airplanes. Smith thought that a company carrying small, essential items by plane could be a more efficient
transporter than existing companies. Smith wrote the paper at the last minute and did not go into details about how to actually run such a company. His professor gave him a "C" for the work. Smith, however, never stopped thinking about creating an express delivery system.

In 1971, after serving in the Vietnam War (1959-75), Smith finally had the chance to put his idea into action. He already owned two Dassault Falcons, small French-made airplanes. In June, he officially launched the Federal Express Corporation while still trying to land his first customer, the Federal Reserve System. The "Fed" serves as the U.S. government's central bank, with twelve district banks around the country. Smith told the Fed he could transport checks and other documents between the banks overnight, greatly reducing the existing delivery time. His idea was to fly the documents to a central airport—a hub—and then fly them out to their final destinations along air routes called "spokes." The Federal Reserve deal fell through, but the hub-and-spoke concept remained at the heart of the FedEx system.

During the next two years, Smith and his advisers studied how they could make an impact in air-cargo transport. Their focus was on high-priority items that weighed less than fifty pounds, such as computer parts or medical supplies. With those kinds of items, fast deliveries were crucial—and so was the company's ability to meet its tight schedules. As Smith said in a 2001 interview with Fast Company magazine, "When you have one of those parts, and a computer is down, or a hospital is in need of something, you really have to do what you say you're going to do."

As he planned his company, Smith searched for investors so he could buy more planes. By March 1973, FedEx had nine Falcons and was ready to start its service in the Midwest and South, with the hub located in Memphis, Tennessee. Leased trucks would carry packages to and from the airports.
On March 12, FedEx employees gathered at the Memphis airport to watch the first night's load arrive. Only six packages arrived in Memphis, and one of them had been sent by Smith. The next month, FedEx tried again and this time 186 packages arrived, marking the company's official beginning.

Timeline

1971:

Founder Fred Smith incorporates Federal Express.

1973:

From its hub airport in Memphis, Tennessee, FedEx begins service to twenty-five U.S. cities.

Struggles and Successes

During the next several years, FedEx won some national attention, but not all of it was positive. The company lost millions of dollars its first year, and Smith drew more bad publicity in 1975 when he was accused of forging documents to obtain loans for FedEx. Cleared of the charge, Smith kept control of the company he founded. FedEx made its first profit
in July 1975, though it still owed large sums of money.

FedEx's situation improved in 1977 when the U.S. government deregulated the air cargo industry. Old regulations had limited how much cargo a plane could carry. When Congress removed those limits, FedEx quickly expanded its business by flying larger planes. The Falcons were replaced with Boeing 727's and 737's and DC-10's built by McDonnell Douglas (see The Boeing Company entry).

As it introduced larger planes, FedEx perfected the hub-and-spoke system. It replaced leased trucks with its own fleet and ran a precise operation to guarantee delivery by noon the next day for its premium service. (This deadline was pushed up to 10:30 A.M. in 1982.) For example, FedEx drivers in Kansas City collected packages at offices and centrally located drop-off boxes, then brought them to a warehouse. From there, the packages went to the local airport and were flown to Memphis. At the hub, workers—mostly part-time college students—sorted the incoming packages and loaded them on planes. The aircraft that brought the Kansas City packages then returned to its home city, carrying items from around the country. In the morning, the packages were put on trucks to be delivered across Kansas City. This same kind of activity was repeated in hundreds of cities across America every working day.

By the early 1980s, FedEx was clearly a winner in the express-delivery industry—an industry it had invented. Competitors such as United Parcel Service (UPS) and Emery had to spend millions of dollars to buy their own planes and try to match FedEx's service. By then, however, FedEx had an advantage, since it had been the first company to tap the overnight-delivery market.

In a typical twenty-four-hour period, FedEx planes travel 500,000 miles, which is the equivalent of circling the globe twenty times.

More Growth—and Growing Pains

FedEx expanded its business line in 1981, adding the overnight delivery of letters and documents. The company also started operating around the world. In 1984, it bought Gelco Express International, an international package shipper based
in Minneapolis, Minnesota, and then purchased several overseas delivery firms.

In its quest to improve quality, the company introduced Service Quality Indicator (SQI) in 1988. Under this system, the company tracked such customer complaints as lost packages, missed pick-ups, and late deliveries. Each complaint was given a point value from 1 to 10. The company goal was to reduce its SQI score while shipping more packages. By then FedEx employees were using hand-held scanners to read the bar codes on invoices. The information on the bar code went into a computer to track the location of packages throughout their journey.

By 1989, sales reached more than $4 billion per year. Internationally, the company grew again when it bought Flying Tigers, another air-cargo delivery company specializing in the overseas market. The purchase, however, added to FedEx's debt, and foreign losses soon reached $200 million. In 1992, the company stopped shipping packages within Europe to focus on shipping goods to and from Europe. The next year, the
company's international division finally made money. Today FedEx sends goods from the United States to more than 200 countries within forty-eight hours.

During the 1990s, FedEx also faced struggles with labor unions. Earlier, the International Brotherhood of Teamsters (who represent truck drivers and many airline workers) and the United Pilots Association had tried but failed to recruit FedEx employees into their unions. In 1992, FedEx pilots voted to join the Air Line Pilots Association. They became the company's only unionized workers, and in 1994 they asked for pay raises and improved benefits. For the next several years, FedEx and the pilots wrestled over these issues and sometimes clashed in court. A Teamsters spokesman told the National Journal in 2001, "FedEx has spent tens of millions of dollars fighting unions, rather than spending tens of millions of dollars to help their workers."

Smith always thought FedEx workers did not need unions, since the company tried hard to treat its employees well. For many years it had a policy of not laying off workers during bad times. It encouraged open communication with all employees and had its own satellite television network to send news to workers around the world. FedEx also stressed employee training and giving workers the freedom to take risks, if it meant serving the customer.

Responding to Change

Entering the twenty-first century, FedEx was the largest air-express shipper in the world, carrying more than three million packages every day on more than six hundred planes. It also played a larger role in ground shipping, after its 1998 purchase of Caliber System, a trucking company. In 2000, the
company introduced FedEx Home Delivery, a new ground delivery service to bring packages from businesses to homes. The move was a reaction to the growing number of consumer purchases made on the Internet. The September 11, 2001, terrorist attacks on New York City and Washington, D.C., kept FedEx's planes on the ground for two days, so its growing fleet of trucks played a huge role in keeping packages moving.

Zap is a Zero

Along with FedEx's successes was one notable flop. In the early 1980s, FedEx feared losing business to the increasingly popular fax machine. The solution was for the company to fax documents from one of its offices to another, charging customers a fee to pick up the original documents and deliver the faxed pages. FedEx introduced its ZapMail service in 1984, but the business never caught on. As the price of fax machines fell, more companies could afford to buy them instead of paying FedEx to do the faxing for them. ZapMail shut down in 1989, after costing FedEx more than $300 million.

At the beginning of 2001, FedEx announced a deal with the United States Postal Service. FedEx began carrying packages for the Postal Service on certain flights and was allowed to place its drop-off boxes at thousands of post offices. The company continues to find new ways to meet the shipping needs of customers around the world.

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